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The IMF Says Vote No

The IMF has left the realms of delusion over Greek debt sustainability. It now has admitted that it failed to realise the damage austerity would do. In other words the deal which Greek voters supposedly vote on tomorrow would not have worked anyway. What do the other European institutions and those Greeks planning to vote Yes think then? Do they still believe you can repeat the demonstrably disastrous Plan A a third time and expect a different outcome?

austerity much bigger than the super-human and self-defeating effort Greece has already made, and

structural reforms that make Greece the leader (!) of Eurozone productivity growth,

then, and only then will we have sustainable debt levels by 2052 !

Read this, again and again, just to realise what the IMF is saying here, and then remember this about those three necessary conditions:

True debt relief was never on the table, and it certainly wasn’t on the table for the deal that is subject to the Greek referendum.

In terms of austerity, the IMF projection I am picking on implies primary surpluses of 4%+ on average over that period. Greece has made more structural adjustments than any other European country, but this is much more than is written in the deal that is subject to the Greek referendum.

In terms of structural reforms, the ones the IMF suggests also go well beyond the deal that is subject to the Greek referendum.

In other words, the IMF says that a Yes to the old deal will not even satisfy a single one of three necessary conditions to get you to sustainability in 40 years. Greece would have to do much more, and the institutions would have to do much more.

Now, the IMF may have its own agenda with this report, namely to tell off the institutions, and to tell off Greece too. Sure, but it would never have a pessimistic bias when looking out to 2050 and beyond.

So if even the IMF says you need true debt relief (where the MoU was planning none), you need more austerity than planned in the MoU, and you need Greece to be at the forefront of structural reforms to the extent that it is the leader of productivity growth in Europe (literally, they are making that assumption!), that you need all of that just to get to debt sustainability by 2052, where does that leave us?

Can voting No provide the answer? Is there any alternative at all? There is, and it’s the point that the Greek government, the IMF, and most economists now agree on.

This is not a matter of left vs. right. I am a neo-liberal in many respects, but I do know that the Euro truly has a design flaw that makes the winner take all and the loser lose all: The strongest economy gets ‘stuck’ with a currency that’s too cheap for them, making exports attractive and imports unattractive (meaning it also accumulates cash that it — almost — doesn’t know what to do with, so it lends to the weaker ones; see below). The stronger economy is becoming stronger from relatively cheap exports, while the worker is feeling poorer because of relatively expensive imports. This is what we see in Germany, and it is a direct consequence of Germany being in a currency union with weaker partners. It undergoes growth that is in large part un-earned, and — at least initially — not benefiting the labor force. Conversely, the weakest economy gets a relatively over-valued currency, driving its balance of trade into ever more unsustainable negative terrain. Imports look cheap, and exports look expensive, the workers feel rich initially and buy foreign goods, getting paid in a strong currency, while their businesses and their employers die of lack of external demand for what’s being produced at unsustainably high labour costs. Jobs get lost, the economy shrinks, and the whole thing becomes self-reinforcing because now the currency is too strong by an even wider margin. Because of the export/import imbalance, the country accumulates debt (in fact, it cannot do otherwise, as long as the imbalance of trade persists, and the prosperous country is only more than happy to lend, as it has a surplus and needs the money to go somewhere external). As long as the ‘rich’ country keeps lending and the poor country keeps borrowing, no-one notices that an unsustainable balance is building up, and that this process is self-accelerating. When the music stops, the blame game begins. That’s exactly where we are. And we got there because of a design flaw in the currency union, not because of Greek profligacy and German rectitude!

In fact, the damage to Germany would be much larger than the damage to Greece (even on a per capita basis) if the Eurozone were to stop being a currency union tomorrow. From a German economic perspective, the ‘weak’ Euro produces unearned income, the ‘weak’ Euro allows inefficiencies, structural problems, and productivity slack to persist and go unnoticed. The Greek labor market is already more liberal than the German one. It is almost impossible to fire an unproductive worker in Germany. Unionisation and strikes are rampant. Only a few years ago, a union of some 50 staff paralysed all of Frankfurt airport, until a judge ordered this ‘disproportionate’ a few days later. A boom breeds complacency. Both the German business owner and the German worker would be caught with their pants down if Germany had the Deutschmark tomorrow. It’s in Germay’s longer-term interest to admit that the Euro has to work, and admit also that it cannot work unless there are balancing mechanisms to equalise the in-built tendency for ever-greater economic divergence, which is un-deserved by both the winners and the losers. Unless the Eurozone becomes a transfer union, providing some effective balancing mechanisms, it is bust.

Saying No to more loans is the first step towards breaking this vicious cycle of divergence, breeding debt, dependence and poverty in the weaker partners, and breeding inefficiencies and contempt in the stronger ones. It would wake up Brussels and nudge it towards saving the Euro from its design flaws. “No” won’t change anything immediately, but it will be an important flag that things have gone out of kilter.

Most people, especially those with some savings, will likely vote “Yes”, because of enormous fear of the unknown. However, when even the IMF economists say three things all need to happen for Greece’s fiscal balance to become sustainable in some 35-40 years:

(a) true debt relief

(b) austerity much bigger than the super-human effort Greece has already made

(c) structural reforms that make Greece the powerhouse of Eurozone productivity growth.

then one must conclude that a “Yes” vote is clinging to a deal that was itself delusional and would never have worked. The deal which is subject to the vote didn’t have debt relief ((a)). So even if Greece promised to deliver (b) and (c), and even if it did deliver (which no-one will believe right now anyway) Greece would still not make it. Time to call a spade a spade. Good night, and good luck!

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P.S.: Two more important things for those who are still undecided how to vote:

(1) The decision whether to exit the Euro does not rest on this vote. The decision is neither with the Greeks nor with Brussels. It’s with the ECB in Frankfurt. Grexit happens if and when, and only if and when, the ECB decides to no longer support the Greek banking system. It will continue breaking and bending its rules to continue support, as it has done. The Euro is a political project of too high an importance. It defies logic to conclude that voting No to a deal that even the IMF no longer supports, a deal that isn’t even possible any more (*), and a deal whose numbers never added up anyway, would somehow sway the ECB into changing course. (**)

(2) Please stop pretending this is about democracy. It is not, at least not at the national level. Such is the agony abroad that if Germany (or many other countries) went to the polls on the Greece-question, Greece would not have had any deal on the table at all. It is a great irony that if the other countries were allowed to vote on this, there would be nothing for Greece to vote on. The Euro cannot ever be a project that is democratic at the national level. If Delaware had a vote about what amount of federal tax ends up in Tennessee, the Dollar would be doomed too.

(*) the deal that Greek voters vote on is no longer possible for two reasons: (1) the IMF cannot extend any further loans now that Greece is ‘in arrears’, and (2) the framework for any new deal is the ESM and the EFSF, which were not established when the ‘old’ deal that voters are asked to opine on was established. The old deal lapsed when the Greek government left the negotiating table, and it truly cannot come back in the form which is now subject to the vote.

(**) None of this means that there won’t be a haircut on deposits. There most probably will be as a condition of further ECB support, but that also does not depend on the outcome of the vote.